Heavy vs. Light Price Differentials Rise As Crude Price Rises
Crude Oil Price Increases
Light Product Prices Increase
Residual Fuel Prices “Flat”
Light Crude Oil Prices Increase Most
Heavy Crude Oil Prices Increase Least
SThe remainder of this section of the presentation will demonstrate how the crude oil price increase was the primary driving force behind the rapidly increasing differentials in 2004.  But before we inspect the data, this chart was drawn to illustrate the mechanism of how crude price affects product values, which in turn affect light-heavy crude price differentials.

SAs crude oil markets tighten, price increases and the prices for light products increase as much if not more.

SResidual fuel prices, however, do not increase as much as crude oil prices, since this fuel competes with other boiler fuels. If the prices of these substitute fuels are not rising as fast as crude oil prices, then residual fuel prices will not increase as much as crude oil prices.

SAs light products rise relative to crude oil and residual fuel declines relative to crude oil, the value of crude oils that yield higher fractions of light products will increase relative to heavier crude oils that yield more residual fuel and less light product volumes.  Thus, light crude oil prices increase more than heavy crude oil prices and the light-heavy crude price difference grows.